Russia's New Oligarchy: For Putin and Friends, a Gusher of Questionable Deals

The news that Dmitry Medvedev, Vladimir Putin's nominee to succeed him as president, wants Putin to become prime minister of Russia next year opens one option for Putin to retain power after his term ends. Putin has little choice but to stay in power as long as he can.

A year ago, a famous Russian journalist asked me: "Is it true that Putin has a net fortune of $35 to 40 billion?" (This journalist, of course, has long been excluded from Kremlin-controlled media.)

This fall, the respected Polish magazine Wprost published its annual response to Forbes, its list of the richest people in Eastern Europe. Besides the well-known business executives, there is Gennady Timchenko, a little-known character with a purported fortune of $20 billion. A small oil trader who resides in Geneva, Timchenko is from St. Petersburg, where he belongs to the same luxurious dacha collective as Putin.

I first heard of Timchenko in February 2004. Ivan Rybkin, a Russian politician who audaciously opposed Putin in the presidential election that year, claimed that Putin was "one of Russia's biggest oligarchs" and that he operated through three middlemen, including Timchenko. Rybkin charged that the Putin-Timchenko group was gobbling up the embattled oil giant Yukos. He swiftly disappeared under mysterious circumstances and, after he reemerged, was forced to suspend his campaign.

Indeed, the privately owned Yukos oil company has been devoured by the state-dominated Rosneft, whose chairman is Igor Sechin, Putin's closest adviser and collaborator. The confiscation, which began in 2003, was publicly justified with not-very-credible citations of tax violations. Rosneft's gain was probably about $100 billion in Yukos assets. US investors in Yukos have lost at least $7 billion; some claim the figure is as much as $12 billion. In October, the House Financial Services Committee's subcommittee on domestic and international monetary policy held a hearing on this, at which I testified.

The Bush administration, however, has not protested this outrageous confiscation of private American property. Then-Secretary of State Colin Powell expressed strong support for Putin in October 2004: "The Russian people came out of the post-Soviet Union era in a state of total chaos-a great deal of freedom, but it was freedom to steal from the state and President Putin took over and restored a sense of order in the country and moved in a democratic way." Putin appreciated-and might have been encouraged by-these words. Two months later, Yukos's main oil field was sold to Rosneft in an auction that Putin's economic adviser, Andrei Illarionov, called "the scam of the year" (for which he was sacked). US shareholders in Yukos have come to realize that the United States has no single valid agreement that safeguards their property rights; European investors, though, can sue the Russian state under three treaties.

The Yukos confiscation has not cost Putin anything. In fact, he unleashed a great wave of renationalization in the postcommunist world. His chums from St. Petersburg are taking over one big, well-run private company after another, turning them into less efficient state-owned firms. One of Putin's close friends from the KGB, Leonid Reiman, is his minister of communications. Last year, an independent arbitration court in Zurich ruled that Reiman, despite his denials, was the real owner of Russian telecommunications assets currently valued at no less than $6 billion. Reiman has amassed this extraordinary fortune as a state official, partly through beneficial privatizations, partly through privileged licenses issued to his companies. A government with any standards would fire such an official, but Putin suppressed this negative information within Russia and kept Reiman on, showing that he accepts corruption.

The Russian daily Kommersant published a long interview with Russian businessman Oleg Shvartsman on the eve of the recent Duma elections. Sensationally, he described how he raided private enterprises to the benefit of KGB officials and described his activity as "velvet reprivatization." Kremlin spokesmen have denied the report.

Even more striking was an interview last month with the Kremlin-connected Russian political observer Stanislav Belkovsky in the German daily Die Welt. Belkovsky, who initiated the Kremlin attack on Yukos, claimed that Putin controlled specific shares of three companies (Surgutneftegaz; Gazprom; and Gunvor, Timchenko's company) worth some $40 billion. Putin has not commented on this allegation.

According to Transparency International, Russia is growing more corrupt even as most other postcommunist countries are controlling their corruption. The fundamental dilemma for Russia, and Putin, is that a system so corrupt cannot be very stable. It's less clear why President Bush does not call Putin out on this or even defend the interests of US citizens and corporations.